Hedge funds may skirt trade rules, regulator says

Claim made by chairman Gary Gensler

Banks may be helping hedge funds avoid rules meant to reduce market risks by routing trades through overseas offices, the top U.S. derivatives regulator said in testimony prepared for a hearing on the Dodd-Frank Act.

Overseas affiliates of the banks may be conducting trades with hedge funds that are organized offshore even though their principal place of business is the U.S., Commodity Futures Trading Commission chairman Gary Gensler said in a statement for tomorrow’s Senate Banking Committee hearing. The effort may be used to avoid rules, taking effect in March, requiring trades to be guaranteed at central clearinghouses.

“The CFTC is working to ensure that this idea does not prevail and develop into a practice that leaves the American public at risk,” Gensler said in the prepared remarks.

Gensler also said the CFTC will soon complete regulations exempting inter-company trades from the clearing requirements. A group of international regulators also expect to finish in the second half of the year rules governing collateral for trades that aren’t settled at clearinghouses, he said.

Regulators plan to hold roundtable meetings in London on Feb. 20 and at the CFTC on Feb. 26 on efforts to revamp the London interbank offered rate, Gensler said. Barclays Plc, UBS AG and the Royal Bank of Scotland Group Plc have settled with regulators and paid fines in a global probe into interest-rate rigging.